If you want to get here, you have to save a lot of money… more than you think. Thinkstock

May 2, 2013

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The world is changing fast, and people have a hard time explaining what's going on, "let alone know how to adapt," says Thomas Friedman in The New York Times. "So let me try to put my finger on it: We now live in a 401(k) world — a world of defined contributions, not defined benefits." This will be a great place for the strivers, Friedman says:

If you are self-motivated, wow, this world is tailored for you. The boundaries are all gone. But if you're not self-motivated, this world will be a challenge because the walls, ceilings and floors that protected people are also disappearing. That is what I mean when I say "it is a 401(k) world." Government will do less for you. Companies will do less for you. Unions can do less for you. There will be fewer limits, but also fewer guarantees. Your specific contribution will define your specific benefits much more. Just showing up will not cut it. [New York Times]

Of course, that stance has plenty of detractors. To wit: Friedman's column "manages to be both incomprehensible and incredibly offensive at the same time," says Felix Salmon at Reuters. It's easy for a "billionaire (by marriage)" like Friedman to write a paean to self-motivation, but his ultimate "kick in the balls" to wage-earners is his "idea that if you have a 401(k) plan, then you're somehow in charge of your own destiny."

In reality, however, a 401(k) plan is an icon of futility and the way in which the owners of capital extract rents from the owners of labor.... The 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and invidious fees. [Reuters]

It's true that for almost everyone in America, "Planet 401(k) is a pretty sucky planet," says Matthew Yglesias at Slate. Poor people don't make enough to invest in a 401(k), and "most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles, or some combination of the three." The system's only winners, really, are the few exorbitantly paid folks with "lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people." However, "since we are in fact living in a 401(k) world, here's some advice":

You've got to save a lot of money for retirement. More than you think. More than you want to. And you need to put that money in a broadly diversified, low-fee fund. And you have to keep it there. Don't panic when the market plunged and sell. In fact, unless you're planning on retiring in the next decade, don't even check how it's doing. Just buy and hold and shift into something less volatile when you're near retirement. Vanguard has these good Target 20XX funds that automatically shift you into less volatile products as you get closer to your target retirement date, allowing you to do even more ignoring of the state of your investments. Which is good. The only way for anyone to make any money managing your savings is to try and trick you into making trades you shouldn't make, or buying products you shouldn't buy. [Slate]

And remember, the defined-benefit alternative isn't much better, says Glenn Reynolds at Instapundit. The "much more forceful, much more statist approach to forced savings" that Yglesias would like — either increased Social Security or pooling savings in a state-run fund, like Singapore — have plenty of problems. Social Security "is going broke," and state pension funds, like California's CalPERS, "are subject to all sorts of politicized investment decisions that have nothing to do with the interests of the pensioners." The 401(k) isn't perfect, but at least "the politicians aren't involved."

"Ultimately, there's no magic solution to retirement savings, though a higher economic growth rate would help a lot," Reynolds adds. And the bottom line is, as always, "if you're not connected you get the shaft."

That's at least something we can all agree on, says James Kwak at The Atlantic. "Even if we solve the more-publicized problems with [defined contribution] plans — under-saving, pre-retirement leakage, etc. — they will still suffer from this constant drain of asset management fees" and 401(k) plan managers favoring their own mutual funds regardless of how they are performing. And we don't get much for our money — the asset management industry has a "proven inability to beat the market."

It's worse than that, says Kenneth Thomas at U.S. News. As PBS's Frontline documented last month, "if you earn 7 percent annually on your 401(k) and pay 2 percent in fees, over 50 years the fees will actually eat up five-eighths of your money." Financially savvy account holders can invest in diversified, low-fee index funds, but the 401(k) was never meant to be the solution to our retirement problem.

Private saving via 401(k) programs was intended to be just one leg of a three-legged stool for ensuring a prosperous retirement, combined with Social Security and an employer-based defined-benefit pension plan. The problem: employers started replacing their defined-benefit plans with defined-contribution 401(k) accounts, since the latter are less expensive for employers....

If two legs of the stool are broken with the continuing demise of true pensions and the gross inadequacy of 401(k) funds, what's the solution?... Expand Social Security, don't cut it! As I have pointed out elsewhere, Social Security is completely portable among employers and raising it places no additional administrative burden on companies. [U.S. News]